FG To Reverse Budget Benchmark If Oil Price Drops Below $60/Barrel
The Federal Government will be forced to reconsider its oil price benchmark for the 2019 budget estimates if the global oil price drops below $60 per barrel, analysts at FSDH Research have said.
The head of research of FSDH, Mr Ayodele Akinwunmi, disclosed this at the monthly media briefing in Lagos.
With the current benchmark pegged at $61, Akinyunmi however noted that Russia and Saudi Arabia will be prompted to act by cutting production to provide the necessary stimulus that will rally prices back up.
He said: “Saudi Arabia needs prices to be at $80/barrel, while Russia need prices to stay above $60 to have an advanced budget.”
According to data obtained from the US Energy Information Administration (EIA) Short-Term Energy Outlook (STEO) in its report for November 2018, crude oil prices declined in October at a faster rate than in any month since July 2016.
Brent spot crude oil price declined by U$10/b in October to close at U$75/b.
Similarly, Bonny Light crude oil price declined by 16.01% in October to close at US$73.34/b. The price of Bonny Light crude oil dropped further to US$59.22/b as at 30 November 2018. This represents a drop of US$28.44/b from the highest price of US$87.66 recorded in October 2018.
The decline in oil prices is attributed to two major factors: the indication of a global economic slowdown, and the higher-than-expected global crude oil supply.
Crude oil is important to the Nigerian economy as the major source of revenue for the government and the largest supplier of foreign exchange to the country.
A significant drop in either the price of crude oil or production will directly have a negative impact on the fiscal position of the country. It will also cause major macroeconomic instability, particularly in the exchange rate and inflation rate.
FSDH Research noted however that the crude oil market developments in 2018 and 2019 would appear better than in 2017.
“Despite these fairly positive developments, we are aware that the crude oil market is very volatile, therefore it is crucial to learn from the events that happened in 2014 through to 2017 in order to take proactive measures against unwarranted economic crisis in Nigeria. Government at all levels must intensify efforts to implement policies that will grow the non-oil sectors of the economy,’’ it said.
The experts said there was accretion to the external reserves in November following four months of consistent drawdown.
FSDH Research also noted that proceeds from the US$2.86bn Eurobond issuance contributed to the growth of external reserves in November.
Data obtained as at Monday, December 3, 2018 from the FMDQ OTC Securities Exchange on the total capital importation through the Investors’ and Exporters’ Foreign Exchange Window (I&E Window) in November 2018 stands at US$1.98bn.
It was learnt that the amount recorded in November is the lowest figure recorded since August 2017, which is an indication of foreign investors’ careful approach to investing in Nigeria.
The CBN remained the largest contributor to the inflow in November, the same trend observed in the last three months.