J.P Morgan: Decline in Oil Prices Will Push Nigeria’s Current Account Balance into Deficit
J.P Morgan: Decline in Oil Prices Will Push Nigeria’s Current Account Balance into Deficit
•Says foreign portfolio outflows likely to accelerate
•Fitch: trade tensions, aid cuts to Nigeria, others won’t trigger downgrades
Emmanuel Addeh and James Emejo in Abuja
Global financial services firm, JP Morgan Chase, yesterday, warned that the substantial decline in oil prices below its break-even of $60 per barrel, will push Nigeria’s current account balance into deficit, if sustained for a few months.
In its report, titled, “Frontier Local Market Strategy: Reducing Risk Further,” JP Morgan said, “Under such a scenario, we had previously estimated that USD/NGN could move above 1700 and, as such, close our trade.”
The investment banker’s cautious assessment came amid a major economic comeback, as Nigeria recorded a Balance of Payments (BOP) surplus of $6.83 billion in 2024, marking a decisive turnaround from deficits of $3.34 billion in 2023 and $3.32 billion in 2022.
JP Morgan, in its assessment, stated that although the Nigeria carry trade had been “one of our highest conviction trades in frontier local markets over the past year, we close our newest iteration of the trade at a loss as the global backdrop has changed since the US administration imposed global trade tariffs last week and expectations of a global recession increased”.
JP Morgan said the reaction of Central Bank of Nigeria (CBN) over the past week had been somewhat proactive.
The report acknowledged that the apex bank increased its dollar sales interventions in order to avoid convertibility risks and limit a disorderly move higher, given the FX markets significant dependence on CBN flows.
The report stated, “When compared to its peers as well as more liquid markets, NGN’s -3.6 per cent move against USD over the past week has been reasonable, in our view (it’s been as much as 6.5 per cent weaker at some points).
“More importantly, as expected, given the FX markets significant dependence on CBN flows, the central bank has had to increase its dollar sales interventions in order to avoid convertibility risks and limit a disorderly move higher.
“The central bank has sold around $550 million to the market over the last week (vs $1.0 billion for the whole of March), a trend which we expect will continue as we think foreign portfolio outflows are likely to accelerate from here (we estimate FPI holdings still amount to at least $10 billion), although a substantial part of these may be private placements which may not be unwound on the interbank market).”
The renowned investment banker also stated that Liquidity of T- and OMO-bills had been lower than FX.
It said while the FX market had functioned better than many expected, the domestic rates market had struggled to absorb supply of foreign-held short-dated securities. It said this had possibly resulted in lower FX demand, while rates had backed up by around 300bps since the start of April.
JP Morgan said, “Given our expectations of increased foreign outflows, the central bank may need to facilitate the better functioning of the market, either by enforcing primary dealer requirements to provide 2-way quotes, or stepping in itself as the buyer of last resort.
“For now, we expect rates to continue moving higher, above 30 per cent in yield terms, as higher premiums are needed for such low oil prices.
“We remain constructive Nigeria in the medium term. As we wrote last week before the tariff carnage, we believe Nigeria will stay the course on its reform journey, especially after implementing the more politically difficult measures of eliminating fuel subsidies and allowing the exchange rate depreciate as well as become more flexible over the last 18 months.
“We think the changes at the state oil changes a company, NNPC, would bear fruit in the medium term, as oil proceeds should now flow more freely into the fiscal accounts, via the central bank.”
Earlier this week, CBN announced the rebound in BOP in a statement issued yesterday by the bank’s acting Director, Corporate Communications, Mrs. Sidi-Ali Hakama.
BOP is a record of all economic transactions between a country’s residents and the rest of the world, including trade in goods and services, income flows, and capital transfers, over a specific period.
The central bank said the improvement reflected the impact of wide-ranging macroeconomic reforms, stronger trade performance, and renewed investor confidence in the nation’s economy.
Under the review period, the current and capital account recorded a surplus of $17.22 billion, underpinned by a goods trade surplus of $13.17 billion.
Petroleum imports declined by 23.2 per cent to $14.06 billion, while non-oil imports fell by 12.6 per cent to $25.74 billion.
On the export side, gas exports rose by 48.3 per cent to $8.66 billion, while non-oil exports increased by 24.6 per cent to $7.46 billion.
Remittance inflows remained resilient, with personal remittances rising by 8.9 per cent to $20.93 billion.
Similarly, International Money Transfer Operator (IMTO) inflows surged by 43.5 per cent to $4.73 billion, compared to $3.30 billion in 2023, reflecting stronger engagement from the Nigerian diaspora.
Official development assistance also rose by 6.2 per cent to $3.37 billion.
Net financial assets acquisitions amounted to $12.12 billion while portfolio investment inflows more than doubled, increasing by 106.5 per cent to $13.35 billion.
In addition, resident foreign currency holdings grew by $5.41 billion, indicating stronger confidence in domestic economic stability.
Although Foreign Direct Investment (FDI) fell by 42.3 per cent to $1.08 billion, the overall financial account posted notable gains.
The country’s external reserves increased by $6 billion to $40.19 billion by year-end 2024, bolstering its external buffer.
Notably, net errors and omissions narrowed significantly by 79.5 per cent to negative $5.10 billion in 2024, down from $24.90 billion in 2023, reflecting substantial improvements in data availability and capture. CBN said this represented a major advance in data accuracy, transparency, and overall reporting integrity.
The year’s surplus highlighted the effectiveness of the country’s ongoing reform agenda.
The liberalisation and unification of the foreign exchange market, a disciplined monetary policy approach to managing inflation and stabilising the naira, and coordinated fiscal and monetary measures had all contributed to enhanced competitiveness and investor sentiment, the apex bank stated.
Responding to the economic feat, Governor of CBN, Mr. Olayemi Cardoso, said, “The positive turnaround in our external finances is evidence of effective policy implementation and our unwavering commitment to macroeconomic stability.
“This surplus marks an important step forward for Nigeria’s economy, benefiting investors, businesses, and everyday Nigerians alike.”
Relatedly, Fitch Ratings said yesterday that pressure from U.S. aid freezes and global trade tension was unlikely to result in wide-scale credit downgrades in Africa, due to the region’s export composition and weaker integration into global supply chains compared to a region such as Asia.
But Sub-Saharan Africa had been one of the largest recipients of funds disbursed by the United States Agency for International Development (USAID), which was frozen by Executive Order of U.S. President Donald Trump, a Reuters report stated.
South Africa, Namibia and Ivory Coast remained relatively shielded from recent events, Paul Gamble, head of Middle East/Africa in Fitch’s Sovereign Ratings Group, said.
Nigeria and the Seychelles both held positive credit outlooks from Fitch Ratings – an indication that a rating was expected to be raised in the future – thanks to ongoing reforms, Gamble told a webinar.
“The reforms that we’ve seen really put the region in a better position to absorb some of these shocks. The impact for the ratings looks manageable,” Gamble added.
However, the freeze on U.S. foreign aid was not without negative consequences, Fitch said. Some of the poorest nations were at risk of having projects come to an abrupt end and would see fiscal stability come under pressure. Ethiopia received U.S. assistance worth around 80 per cent of its foreign exchange reserves, with Mozambique, Uganda, and Lesotho also seen at risk.
“African-owned multilateral banks might become more important institutions in this shifting landscape,” Arnaud Louis, senior director at Fitch, said on the webinar.
Gamble also pointed to Washington’s pivot to strategic investments in minerals in Africa as potentially becoming a new sphere for the trade tensions as it could intensify competition on the continent with China.
“Africa will be a playing field for US-China tensions,” said Gamble. The U.S. interest was becoming “more opportunistic, transactional”, focusing on access to minerals and rare earths rather than broad-based development, he said.
Meanwhile, Nigeria expected to exit the Financial Action Task Force’s gray list this year after passing a new investment law that will allow regulation of cryptocurrencies. The new Investment and Securities bill will pave the way for crypto operators to be legally monitored, and the Securities and Exchange Commission (SEC) hoped to grant full cryptocurrency exchange licenses within the next two years.
“I am 100 per cent hopeful” the nation will exit the Financial Action Task Force’s so-called gray list this year, SEC Director-General, Emomotimi Agama, told Bloomberg.
Nigeria had taken steps to fix shortcomings in its anti-money laundering and counter-terrorism finance monitoring identified by FATF when it placed the West African nation on the list in 2023. Another reason was the lack of legislation to cover the regulation of digital assets.
President Bola Tinubu last month signed a law that handed oversight of the industry to SEC. The new Investment and Securities bill will pave the way for crypto operators to be legally monitored.
Agama said he hoped to grant full cryptocurrency exchange licenses within the next two years. He said SEC was reviewing applications from Yellow Card Financial Inc. and others to join a so-called incubation process to put them on trial and watch.
He stated, “For us, it is a learning process and the idea is to study, to observe what they do, how they do it and what are the risks involved.”
Agama added, “We are working to develop more people, train more people to build capacity for the regulation of digital assets.”
Nigeria’s youthful and digital-savvy population had adopted cryptocurrencies as a hedge against high inflation and the steep depreciation of the naira since mid-2023. Africa’s most populous country ranked second worldwide in an index of global cryptocurrency adoption calculated by blockchain analytics company, Chainalysis, in a 2024 report.
•Says foreign portfolio outflows likely to accelerate •Fitch: trade tensions, aid cuts to Nigeria, others won’t trigger downgrades Emmanuel Addeh and James Emejo in Abuja Global financial services firm, JP
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