Market News

By : GEOFF IYATSE

The United States’ Saturday attacks on Iran have thrust the Middle East into an extremely volatile conflict with the global economy walking a tightrope. With Brent already rallying by about 20 per cent in the past month and JP Morgan already betting on a $130 per barrel in the worst-case scenario, the global economy braces for a major spike in prices that could mean a major lift for Nigeria’s fiscal position, GEOFF IYATSE writes.

At the weekend, the United States reversed its watch-and-see posture on the Israel-Iran conflict, launching attacks on three Iranian nuclear facilities. The Saturday strikes, described by President Donald Trump as a “spectacular military success” and the response from Iran are symbolic of the deepening lack of credibility on the global fronts. More importantly, it suggests that the global economy has entered a new phase of uncertainty – driving on the super highway.

As the global economy hangs in the balance, there will certainly be gainers. And indeed, there are gainers already. For oil-producing countries, it is already looking like another era of ultra-high earnings with the market turning greener daily. For instance, Brent oil futures for July delivery gained over nine per cent, trading at $78 per barrel, the highest since early February. West Texas Intermediate (WTI) crude futures increased to $75 per barrel, posting a 10 per cent increase at their peak.

In the past month, Brent jumped by as much as 20 per cent month-on-month to cross $79. And JP Morgan said a $130 per barrel Brent is possible in the worst-case scenario. JP Morgan’s projection comes on escalating concerns over a possible blockade of the Strait of Hormuz which could trigger a sharp surge in oil prices. A Goldman Sachs analyst, Daan Struyven, raised his short-term price target for Brent to $90, warning that the conflict could briefly cut 1.75 million barrels per day (bpd) of Iranian oil.

At a short-term conservative projection of $100, Nigeria will be trading at 33 per cent above the $75 budget benchmark, which will strengthen the Central Bank of Nigeria’s (CBN) gripe on the naira, public revenue and consolidate on the gains of stronger external reserves, which in turn could raise Nigeria’s confidence rating. At the tail of the raging crisis, analysts said the country is already leveraging the oil prices rally for a firmer fiscal position, stronger external position and better net foreign exchange reserve (NFER), which rose to a multi-year high in December.

Already, Nigeria’s outlook has brightened as crude oil passed the Federal Government’s benchmark for the first time. Good enough, the reforms introduced in the past two years have reduced market rigidities, reduced historical leakages in the forms of subsidies and helped to offset outstanding FX obligations owed to foreign airlines and others.

At about N1550/$, the naira has held firm against the dollar in recent years. Indeed, the first half of the year is passing as the least volatile period in both official and parallel markets. At a trading range of N1580$ – N1600/$ at the black market, the premium on the unofficial market is current at less than three per cent. That means little incentive for round-trip transactions, a major setback for a stable FX market.

A sane market operation means increasing inflow through the official segment of the market, less rent-seeking behaviour and more attraction to foreign fund managers. The past two years have witnessed significant growth in capital importation. For instance, in Q1 of 2024, the figure rose by about 200 per cent to $3.4 billion compared to N1.13 billion recorded in the comparative quarter in 2023. There was a snap towards the end of last year but the improved confidence seen since the beginning is a pointer to improved inflow.

Already, the performance of the foreign portfolio at the capital market suggests an uptick. Last year, foreign inflow grew by 137 per cent year-on-year to N400 billion. This year, foreign participation has seen a consistent month-on-month increase, suggesting improved interest.

However, the rising tension could point to a sustained global de-risking and a break in the rebound in emerging market assets that followed the suspension of the US tariff impositions on other countries. Another round of capital flight to haven could trigger a loss of confidence in emerging markets with a negative impact on the FX market. Can Nigeria’s higher FX earnings offset the likely outflow of capital to dollar assets?

Perhaps, Nigeria will be insulated. First, its sovereign rating is at its multi-year peak – a reminiscence of where it was when the country returned to democratic government in 1999. This month, the World Bank upgraded the growth projection to 3.6 per cent, remarkably higher than the global average, and highlighted positive internal factors beyond crude that gave out Nigeria as a country to watch this year.

In April, Fitch Ratings upgraded Nigeria’s long-term foreign-currency Issuer Default Rating (IDR) from ‘B-‘ to ‘B’ with a stable outlook. This upgrade, it said, reflected improved policy coherence and credibility due to recent reforms. It noted that the reforms, including exchange rate liberalisation, tighter monetary policy and the removal of fuel subsidies, have reduced economic distortions and near-term risks to stability. The snag on Nigeria’s outlook in recent months was declining oil prices. For one, Moody’s warned earlier in the month that the CBN’s ability to maintain a stable naira without draining reserves might be impacted by declining oil prices and stubbornly high inflation. The rating agency shared its thought when it equally upgraded Nigeria’s long-term foreign currency and local currency issuer ratings to B3 from Caa1 and changed the outlook to stable from positive.

Less than a month after the declining oil worry, the market has pivoted completely while inflation, according to the recent consumer price index (CPI) reading, inflation has eased considerably. The rising oil price may have changed the worry raised by Moody’s and even improved its fiscal position.

Apart from surging oil revenue, which raises the hope of better funding of the N55 trillion budget, the FX market reforms have proven to be a game-changer in dollar inflow. Today, the CBN is a roadshow engaging international money transfer organisations (IMTO) to improve remittance to increase FX injection. Alongside the Ministry of Industry, Trade and Investment, it is also engaging manufacturers on value additions that could increase FX injection via exports and reduce leakages.

According to the CBN Governor, Yemi Cardoso, Nigeria can draw from China’s economic strategy to increase its competitive advantage and drive export-led growth. To harness this potential, businesses are expected to adopt export-oriented strategies by targeting sectors with strong export potential such as agriculture, manufacturing and creative industries, implement import-substitution models by strengthening domestic production capabilities and reducing reliance on costly imports and focus on value addition, shifting from commodity export to export of processed goods.

The creative sector alone, Cardoso has said, has the potential to attract $25 billion yearly to the economy, highlighting the untapped opportunities in Nigeria’s expanding creative sector, including music, film, crafts and digital exports. He urged businesses to explore international markets, digital platforms and global tours to increase dollar revenue inflows.

The discussion on import substitution is also shifting to telecommunication – a sector known for heavy reliance on imports (of both hardware and software and knowledge as well as knowledge). Last week, the CBN boss reportedly had a session with Airtel executives during which they shared ideas about the possibility of producing key components currently imported locally to conserve FX.

He noted that massive production of key inputs that are currently being imported, like SIM cards, cables and towers would help to reduce the huge FX lost through the sector. Airtel Africa’s CEO, Sunil Taldar, in response, sought the support of the CBN in scaling up local production of essential components, saying it would benefit telecom companies in the long run.

Unlike previous tensions, experts are beginning to see the Middle East tension differently as it affects Nigeria. Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, admitted there would be a flight of investments to safe-haven assets as uncertainty heightens.

These could come in two layers – tension-induced de-risking, which has started. Higher oil prices would also trigger a fresh inflation concern, which could mean keeping interest rates in the global north high, making their economies more attractive for capital flow.

Despite this dragnet and its potential setback for stability in developing countries, historically, output growth and market performance are rising functions of crude oil prices. This relationship may not see a breakdown anytime soon, not likely in this bullish trend.

“The outlook for the Nigerian stock market is therefore likely to be positive in the current context,” Yusuf stressed. He added that the surge in crude oil price would impact Nigeria’s FX earnings, with crude still the highest Nigeria’s FX earner.

“The oil sector currently accounts for a significant amount of government revenue. An improvement in crude oil prices would therefore have a significant impact on government revenue. An improvement in revenue would positively impact fiscal consolidation and hopefully moderate the growth of the fiscal deficit.

“Investments in the oil and gas sector would post better returns if the conflict persists. High oil price is good news for upstream oil and gas investors,” the economist noted.

The possibility of the Federal Government achieving N19.5 trillion oil revenue target for the year rises with the soaring prices of crude oil, analysts have said. But the real game-changer is increasing production significantly beyond the current 1.5 mbpd. This, of course, means pushing for a drastic change in approaches to addressing the insecurity challenge in Niger Delta and, ultimately, reducing the endemic oil theft.