04 August 2020
Speakers’ highlights – Renaissance Capital Webinar 'Big shift coming for EM/FM and how Nigeria will benefit. Oil price trajectory and its implications for Nigeria’

Renaissance Capital’s webinar

‘Big shift coming for EM/FM and how Nigeria will benefit. Oil price trajectory and its implications for Nigeria’

  • Invitation-only event
  • Moderated by Temi Popoola, CEO of Renaissance Capital in Nigeria
  • 150+ online participants, representatives of major international and local investment funds and banks, as well as selected media

Speakers’ highlights

Charles Robertson, Global Chief Economist, Renaissance Capital

  • The 2008 global financial crisis has led to negative eurozone yields, which anchors low UST yields and results in a hunt for yield in EM, FM and HY because local investors will get no yield if they stay in their own bond markets. Moreover, the big inflation fall that happened in the US 5-10 years ago has started to infect emerging markets. We have already seen it in Eastern Europe, some Asian countries such as China, Korea, Taiwan, and I would be expecting that the next big disinflationary impulse might affect Russia, Brazil, Mexico and South Africa.
  • The young population in low-income countries and much of Africa and South Asia is going to produce much less vulnerability to Covid-19. In Nigeria, zero per cent of the population is vulnerable to the virus because it’s so young, with 0% of the population aged 80+ years. The stats say that YtD COVID-19 deaths in Nigeria totalled 896, which is effectively 0% of normal year deaths (2.3mn).
  • One of the most important shifts coming out of the pandemic for EM is Trump’s likely loss in the November election, because all presidents get re-elected if they don’t have a recession in their first term and all presidents lose if they do have a recession in their first term, even if it’s not their fault. Trump successfully stimulated the US from 2017-2020, and hurt EM via trade wars – this saw net FDI flow into the US, strengthening the US dollar and hurting EM. A change of president is EM positive.
  • EM currencies (excluding China) have been in a depreciating trend for about 10 years. Now they are cheap to their long-term average and we believe this is a good time to get into emerging markets. And this bodes well for Nigeria because we see appetite for equities, growth and yield, and Nigeria, in our view, is certainly is offering some of those.  
  • Nigeria’s development trajectory has to be less about oil and more about industrialisation. Luckily, the rate of literacy at c. 70% in some parts of the country makes it possible, while many African regions are years away from it. However, industry still doesn’t make 20% of GDP in Nigeria because the electricity is not there and cannot be financed with cheap credit like in some other countries – China, Vietnam, Morocco and Mauritius. The key reason behind that is the fertility rate, which still remains five children per woman in Nigeria: it turns out that you need to have low fertility to have high savings, which gives you a big banking system to finance economic development, including electricity.   
  • What we think Nigeria can do in the meantime is to run a current account (C/A) surplus, do the East Asian model, i.e. have a cheap currency, import less, and use cash from the C/A surplus to invest. An alternative way to drive growth is to attract foreign investment, but unfortunately the numbers don’t look great for Nigeria: it got less FDI than Ghana in 2018 – despite being a larger country.
  • However, recent developments leave Nigeria to one interesting option for the next few years: with super low interest rates globally, foreign investors should be desperate for yields and eventually will bring US dollar borrowing costs in Nigeria to record lows. This will create opportunities for Nigeria to borrow cheap in dollars and invest in the electricity sector, particularly in the south of the country, and industrialise, and then the southern states can be growing at 7-10% a year. The risk is that the money is not spent wisely, which would leave Nigeria with a huge foreign debt and a still inefficient electricity system.
  • As for Nigeria equities, they are cheap but foreign investors are looking for growth rather than value; although Nigeria offers value it is not yet producing growth, with the capital GDP shrinking for five years. The FX regime needs to allow investors to leave if you want them to enter.

Alexander Burgansky, Head of Oil & Gas Research, Renaissance Capital

  • We expect the combination of demand recovery, inventory reductions and the expected high level of compliance with the OPEC+ deal will lead to a continuing recovery in the Brent oil price to what we believe is its long-term marginal production cost of $50/bl.
  • Nigeria’s OPEC quota compliance levels have historically been poor and despite a recent improvement in compliance levels, we expect Nigeria to remain in breach of its production quota. Nigeria produces 2.0-2.1mmbopd of liquids (crude and condensates). Condensates (15-20% of total liquids) are not included in OPEC production cuts and are exempted from quotas. Following OPEC+ cuts, Nigeria had to reduce its crude production to 1.41mmbopd from May. Classification of condensates makes a difference to compliance. NNPC does not consider Agbami grade (150-200kbopd) as crude and excludes it from its reported crude production levels. OPEC’s secondary sources include Agbami in Nigeria’s crude production. Nigeria reduced crude production in June-July, in order to compensate for May’s overproduction but still exceeded its June quota, according to OPEC’s secondary sources. Agbami’s different classification by NNPC and OPEC will make future compliance hard to achieve.
  • The Nigerian oil sector faces significant challenges and the renewed oil price expectations makes the need for reform more urgent. Our long-term production outlook is negative, reflecting lower investment expectations.
  • Deepwater accounts for almost 40% of Nigeria’s liquids production and many of Nigeria’s major projects sit within ‘1993’ PSCs and PSAs that expire mostly in 2023-2028. The majors are reluctant to invest further in deep water amid the fiscal uncertainty. The introduction of royalties to PSCs in 2019 further discourages investment in Nigeria’s deep water sector. The Petroleum Industry Bill has been in the making for almost two decades.
  • The high local content requirements make Nigeria resilient to cost deflation. NNPC is asking the oilfield services sector to take some of the hit. Other geopolitical considerations include security situation, crude evacuation routes, ageing infrastructure and poor uptime bottlenecks growth.
  • Nigerian crude is typically priced at a premium to Dated Brent, with some grades in particular selling at $3/bbl+ premium. April’s extreme market imbalance and rapid fill up of Nigerian crude storage had forced NNPC to reduce Nigerian OSPs to substantial discounts. Bloomberg reported that traders requested even steeper discounts to OSPs. The OPEC+ agreement has helped to rebalance the market and July OSPs have now returned to premium levels, although they still remain lower to the levels prior to the pandemic