Analysts Seek Speedy Reforms in Oil Sector to Boost Investments

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Peter Uzoho

Analysts have called for speedy reforms in the oil and gas sector to boost investments in 2020, stressing that the apparent reluctance of the federal government to implement reforms such as the downstream sub-sector deregulation threatens the economy and may hamper investments.

Analysts at Cordros Capital Limited, a Lagos-based investment and financial advisory firm, stated this in their economic review and 2020 economic outlook, titled: “At the Cliff’s Edge,” which THISDAY obtained yesterday.

The federal government spent N462 billion on under-recovery, also known as fuel subsidy between January and September 2019, the Nigerian National Petroleum Corporation (NNPC), had revealed.

In the 62-page report, the analysts stressed the importance of timing in the implementation of policies.

“Investors’ clamour for the implementation of more market-friendly reforms is yet to resonate with the government. In their defence, we believe the federal government would lose sleep over the perceived negative impact on the ordinary Nigerian,” it stated
It said the impact of the deregulation of the downstream oil and gas sector would be far more reaching, even as it advocated the devaluation of the naira.

“Our prognosis is that neither of the above will come to light in 2020. Against that backdrop, bias is for capital inflows to remain tame,” it added.

The report noted that following the lacklustre performance for much of 2018, it was a slow start for the economy in 2019 as oil Gross Domestic Product (GDP) dipped by 1.5 per cent year-on-year, on account of moderation in crude oil production.

It explained that the shutdown of seven oil terminals and an upsurge in points of pipeline vandalism (+67.0% y/y), which led to the build-up of unsold crude dampened oil GDP growth in the period under review.

Among the terminal’s shutdown were Agbami Terminal (25,000bpd capacity) and Qua lboe terminal (168,000 bpd capacity).
Bucking the negative growth trend, oil GDP widened by 5.2 per cent year-on-year as of the second quarter of 2019, the first growth in five consecutive quarters.

The outturn was supported by improvement in crude oil production, with the National Bureau of Statistics (NBS) estimating daily crude oil production over Q2-19 at 2.02mb/d, and a low production base of 1.84mb/d from the corresponding quarter of the previous year.

The firm also stated that while the economy was expected to benefit from exchange rate stability given the country’s healthy forex reserves, the possible implementation of a hike in the Value Added Tax (VAT), the impending electricity tariff revision and the impact of the continued land border closure on food prices would exert upward pressure on inflation.

On the monetary policy side, they anticipated that the benchmark monetary policy rate (MPR) would be left unchanged despite recent focus by the Central Bank of Nigeria (CBN) to redirect credit to the private sector.

“To add, the still weak transmission of monetary policy changes to the real economy also begs the question of the usefulness of a rate cut. Instead, we would expect to see more unconventional policy surprises as the CBN hopes to reflate the economy in the absence of fiscal stimulus,” it added.

Commenting on the N10.6 trillion federal government budget approved for 2020, the report assumed a budget implementation rate of about 90 per cent, saying that its scenario analysis suggests that the budget deficit could range between N2.83 trillion to N4.78 trillion.

“Nonetheless, we believe that it is unlikely for FGN’s domestic paper issuances to run ahead over 2020. Instead, we expect the trend of fiscal reliance on Ways & Means to continue over 2020.

“After a modest performance recorded in 2019, our growth forecast for 2020 is conservative, with our model suggesting limited upside in the oil sector, but a stronger non-oil sector growth.
“For the oil sector, the combination of extension of OPEC’s crude oil production cut agreement, and unfavourable high base from 2019 look set to put a cap on oil sector growth next year.

“Thus, our prognosis is that the non-oil sector will dictate the pace of growth over 2020. To be clear, we believe the federal government’s continued efforts to curb herders-farmers conflict would drive the agricultural sector back to its historical level.

“Meanwhile, the CBN’s push for higher credit to the private sector is expected to improve activities within the manufacturing space. Similarly, we expect the recently introduced payment service bank by the telecommunication sector to drive better performance in the service sector,” the report said.