Nigeria, Others Turn To SWF Savings To Mitigate Oil Price Slump
Nigeria, Norway, Iran and other oil-producing countries have resorted to drawing down on savings in their sovereign wealth funds (SWFs) to help mitigate the impact of the global slump in crude prices largely induced by the COVID-19 pandemic.
Oil price volatility has been worsened in the last few months owing to a supply glut due to low demand occasioned by the pandemic and price war among some top producers.
Crude oil price, which stood at $20 a barrel on Wednesday, rose marginally yesterday to $21.97, spurred by rising tensions in the Middle East, output cuts by producing nations to tackle oversupply and the promise of more government stimulus to ease the economic pain of COVID-19 pandemic.
A sovereign wealth fund is a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, proceeds of privatisation, governmental transfer payments, fiscal surpluses and/or receipts resulting from resource exports.
Most oil-based funds like the Nigeria Sovereign Investment Authority (NSIA), operators of the nation’s SWF, are required to keep substantial cash-buffers in place in the event of a collapse in oil prices triggers a request from the government for funding.
As oil prices continue on a precipitous slide in recent weeks following the Saudi-Russia price war and largely the global economic meltdown precipitated by the COVID-19 pandemic, Nigeria and many countries with oil-based sovereign wealth funds have resorted to seeking succour from such funds.
The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, last week announced President Muhamadu Buhari’s approval for the withdrawal of $150 million from the stabilisation component of the NSIA to augument the June distribution of the Federation Accounts Allocation Committee (FAAC) to the three tiers of government.
The NSIA has three-ringed components, including the Future Generations Fund, Infrastructure Fund and Stabilisation Fund.
Rationalising the planned withdrawal of $150 million, the minister said it was meant to cushion the negative impact of the drop in revenue on the Federation Account.
Ahmed explained that since January, revenue inflow into the account had been declining, a situation that had affected the amount distributed among the three tiers of government.
Based on the fiscal assumptions underpinning the 2020 Appropriation Act, she said monthly FAAC disbursements to the federal and state governments were projected at N888.5 billion, adding that due to the significant drop in international oil prices, FAAC monthly disbursements declined to N716.3 billion in January and N647.4 billion in February 2020.
“Our experience shows that monthly average FAAC receipts must average at least N650 billion for the federal and state governments to meet their current obligations.
“Unfortunately, we project that monthly receipts may decline to below N400 billion over the next three to six months,” she stated.
While Nigeria faces serious revenue squeeze occasioned by the tumbling oil prices precipitated by very low demand, other oil-producers are not left out.
The Norwegian fund, reputed to be the world’s biggest sovereign wealth fund, is on the verge of a forced asset sale.
Reports show that Norway faces its worst economic shock in half a century.
With petroleum revenue sharply down, the government has much less income to use on crisis measures.
That means it will need to withdraw historic sums from its wealth fund to make ends meet.
While past withdrawals were easily covered by the fund’s cash flow, that is no longer the case.
Companies it invests in are now suspending dividends en masse, in response to the crisis.
Its outgoing Chief Executive Officer, Yngve Slyngstad, said cash flow this year would be “significantly lower” than previously expected.
In 2019, the fund got 243 billion kroner ($30.9 billion).
The Norwegian government will need to pull at least 266 billion kroner from the fund this year, if oil prices stay at current levels through 2020.
According to Bloomberg News, the situation is quickly deteriorating, and the numbers remain subject to change.
It is projected that the Norwegian government’s withdrawals from the sovereign wealth fund would reach 150 billion kroner (about $13 billion).
Iran, another oil-producing country with a robust sovereign wealth fund, is also resorting to mitigating its revenue challenges through the fund.
Leader of the Islamic Revolution, Ayatollah Seyyed Ali Khamenei, has approved the withdrawal of $1 billion from the National Development Fund of Iran—the country’s sovereign wealth fund—to help fight Coronavirus.
President Hassan Rouhani said recently that the government was seeking approval for the withdrawal of the money from the SWF.
The money, he said, would be used for the needs of the health ministry and the unemployment insurance fund.
A recent report by Bloomberg indicated that sovereign wealth funds from oil-producing countries, mainly in the Middle East and Africa, are on course to dump up to $225 billion, as plummeting oil prices and the pandemic hit countries’ finances.
The rapid spread of the virus has ravaged the global economy, sending markets into a tailspin and costing both oil and non-oil based sovereign wealth funds around $1 trillion in equity losses, according to JPMorgan strategist Nikolaos Panigirtzoglou.
His estimates are based on data from sovereign wealth funds and figures from the Sovereign Wealth Fund Institute, a research group.
Around $100-$150 billion in stocks have likely been offloaded by oil-producer sovereign wealth funds, excluding Norway’s fund, in recent weeks, Panigirtzoglou said.
The Norwegian sovereign wealth fund said it had lost $124 billion so far this year as equity markets sunk.
Oil Price Rises to $21 on Gulf Tensions, Output Cuts
Crude oil price rose marginally yesterday to $21 a barrel, spurred by rising tensions in the Middle East, output cuts by producing nations to tackle oversupply and the promise of more government stimulus to ease the economic pain of COVID-19 pandemic.
Global benchmark, Brent crude, was up by $1.60, or 7.8 per cent, at $21.97 per barrel while United States’ West Texas Intermediate (WTI) crude rose $1.74, or 12.6 per cent, at $15.52 per barrel.
Oil prices have suffered one of their most tumultuous weeks due to low demand that has created a supply glut.
The expiring WTI front-month contract on Monday fell into negative territory for the first time as traders paid buyers to take crude off their hands given a lack of storage space due to the current supply glut.
Brent has lost roughly two-thirds of its value this year.
Concerns about the collapse in demand because of travel restrictions to contain the virus and a shortage of space to store oil still dominate, but analysts said they did not expect a repeat of Monday’s price shock.
The price rally yesterday followed an announcement from the United States President Donald Trump that he had instructed the US Navy to fire on any Iranian ships that harass it in the Gulf, although he added later he was not changing the military’s rules of engagement.
The head of Iran’s Revolutionary Guards said Tehran would destroy US warships if its security was threatened in the Gulf.
Output cuts by producers also supported prices.
Kuwait said it had begun reducing oil supply to the international market without waiting for the deal agreed by major oil exporting countries to take effect on May 1.
The Organisation of Petroleum Exporting Countries (OPEC) and other oil producing nations, a grouping known as OPEC+, agreed this month to cut output by about 10 per cent of global supply, to push up oil prices.
In addition to the OPEC+ deal, other producers are also pledging reductions. Oklahoma’s energy regulator said companies could shut wells without losing their leases. The state is the fourth-largest oil producer in the United States.
United States crude inventories rose by 15 million barrels to 518.6 million barrels the week to April 17, close to the record of 535 million barrels set in 2017, data showed on Wednesday.
The stocks build was less than the market had expected, analysts said, providing some support for prices, while the promise of more government stimulus improved market sentiment across global markets.
The US House of Representatives was expected to pass a nearly $500 billion Coronavirus relief bill yesterday to provide funds to small businesses and hospitals.
OPEC Cuts Unlikely to Save Nigeria from Recession, Says NNRC
The Nigeria Natural Resource Charter (NNRC) yesterday said it would be difficult for Nigeria to rely on agreed oil production cuts made by member countries of the OPEC and its allies stop a looming economic recession occasioned by the pandemic.
NNRC, a not-for-profit policy institute committed to supporting Nigeria’s effective management of its natural resources for public good, explained that it would be wise for the country to extensively reform its oil industry.
It noted that the reforms would include privatisation of the country’s refineries, which are currently broken-down, sale of unviable oil assets, liberalisation of downstream sector and prioritisation of gas for industrialisation of the country.
In a statement by its Programme Coordinator, Ms. Tengi George-Ikoli, NNRC noted that despite Nigeria’s cutting down of its 2020 budget estimates and embracing OPEC’s measures to shore up oil prices, the “production cuts may be too little too late and so Nigeria must look internally for solutions and adopt interventions that take a longer-term view.”
The NNRC added that the effects of the pandemic on the oil sector has provided Nigeria another opportunity to “revisit the much-advertised policy of economic diversification,” while future strategies adopted by the country must be sustainable.
For the country to stabilise the oil sector, maintain revenue flows from it, attract investment and drive growth, the NNRC said it must strive to maintain peace and stability in the Niger Delta to sustain oil production.
“Sustaining beneficiation schemes by NDDC, MNDA and other interventions will support the governments’ stabilisation efforts,” it stated.
The group also called for improvement in coordination between the federal government and Niger Delta state governments on the response to the COVID-19 pandemic, including the design and implementation of stimulus plans as well as liberalise the downstream sector to allow market forces determine pump prices for petroleum and other products.
The NNRC said: “This will ensure the availability of revenues necessary for more critical areas of the economy.”
It called for the formalisation of an oil revenue savings mechanism with clear and transparent operational rules.
“This could be by retaining the more effective Sovereign Wealth Fund (SWF) in the NSIA and transferring funds from the Excess Crude Account, the stabilisation fund and other similar funds to the SWF.
“This will help fortify the Nigerian economy from oil price volatilities and other economic shocks,” it explained.
It also urged the federal government to support a major and urgent shift to gas in terms of investment focus with gas supply to domestic market for power, industrial and manufacturing feedstock as enabler to economic development.
The NNRC asked the government to “fast-track the passage of the petroleum industry bill to bring about the fiscal, governance and regulatory clarity required to monetise Nigeria’s 200+ tcf of gas reserves.”
