Oil gloom: Nigeria’s instability to worsen

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Fred Ojiegbe, with agency reports

Thinning oil income will continue to stoke political and social instability as Nigeria and other oil dependent nations come under direct impact of covid pull on oil demand and revenues in the short term and a wider global demand shift to cleaner energy delivers long term impact on the economy.

International risk consultancy firm, Verisk Maplecroft, listed Nigeria among the first four vulnerable African countries with little or no shock absorbers for protracted revenue shocks that would inevitably come with fast paced energy transition and sooner than expected peak demand for oil. The company said that the consequent harsh living standard that would beset the country would spark off a wave of social and political instability.

Oracle Intelligence reports that political, social and economic tension in Nigeria has continued to worsen in the past five years as the country suffers poor dollar returns from the international market and rising debt burdens as the government resorts to massive borrowing.

Verisk Maplecroft said in its 2021 Political Risk Outlook that whereas energy transition to cleaner sources poses long term threat to oil economies, the prevailing Covid-19 pandemic continues to eat into the foreign exchange reserves of oil dependent nations.

The company stated that countries that had failed to diversify their economies away from fossil fuel exports faced a “slow-motion wave of political instability;” pointing out that oil dependent economies like Nigeria must adapt to changing economic outlook or face sharp changes in credit risk, policy and regulation.

Though some countries are increasing fossil fuel investment in the short term, consensus estimates indicate that “peak oil” will be reached in 2030, after which the transition toward a low carbon economy will gather steam and force oil-producing countries to adapt their revenue streams.

Analysts suggested the worst-hit countries could enter “doom loops of shrinking hydrocarbon revenues, political turmoil, and failed attempts to revive flattening non-oil sectors.”

Since the oil price crash of 2014, most exporters have either stagnated or reversed efforts to diversify their economies, Maplecroft data highlighted, with many doubling down on production in the ensuing years in a bid to plug revenue holes.

“Despite this, the majority took a hit on their foreign exchange reserves anyway, including Saudi Arabia, which has burnt through almost half of its 2014 dollar stockpile,” the report added.

Break-even costs, the capacity to diversify and political resilience were identified as the three key factors determining the severity of the impact on stability when the expected energy transition begins to bite.

“Currently, if countries’ external break-evens – the oil prices they need to pay for their imports – remain above what markets can offer, they have limited choices: draw down foreign exchange reserves like Saudi Arabia since 2014, or devalue their currency like Nigeria or Iraq in 2020, effectively rebalancing their imports and exports at the expense of living standards,” the report explained.

Nigeria, Africa’s largest economy, relies on crude sales for around 90% of its foreign exchange earnings and has devalued its naira currency twice since March last year. The Central Bank of Nigeria (CBN) resisted calls by the IMF last month to devalue the Naira once again.

Verisk Maplecroft researchers suggested that recent currency devaluations were a “harbinger of the bleak options” ahead for oil-producing countries, who will have to either diversify or face forced economic adjustments.

“Many, if not a majority, of net oil producers are going to struggle with diversification largely because they lack the economic and legal institutions, infrastructure and human capital needed,” said Head of Market Risk James Lockhart Smith.

“Even when such institutions are in place, the political environment, corruption or governance challenges and entrenched interests mean some may not reform their way out of trouble, even where it is the rational course.”

The most vulnerable countries are higher-cost producers that are heavily dependent on oil for revenues, have lower capacity to diversify and are less politically stable, the report said, identifying Nigeria, Algeria, Chad and Iraq as the first to be hit “if the storm breaks” due to their fixed or crawling exchange rates.

Lower-cost Gulf producers with stronger economic institutions and resources that enable easier diversification, such as the UAE and Qatar, were seen as least susceptible to political upheaval. However, Lockhart Smith suggested that even they will not emerge unscathed.

“Authoritarian political stability is anything but stable over the long term and, as lower-for-longer oil prices cut into social spending, additional pressure will pile on these deceptively fragile political systems,” he said.

“Even diversification could come with its own political risks by challenging traditional petro-state social contracts: legitimacy to rule in return for hydrocarbon largesse.”