Friday, December 5, 2014

Nigeria cuts oil price benchmark due to falling global oil prices

The Nigerian naira weakened slightly on Thursday, staying below the central bank's new target band, as the government slashed the oil price assumed in its 2015 budget for the second time in a month.

The naira is under pressure as falling global oil prices have depressed Nigeria's foreign reserves and the central bank is struggling to keep the currency in a new target band set last week when it devalued the currency by 8 percent to protect its reserves.

On Thursday, the finance ministry said it had cut its oil price forecast on which its 2015 budget is based by 11 percent to $65 a barrel from $73, in light of lower world oil prices.

The naira closed at 180.10 naira to the dollar, staying outside the new target range of 160-176 naira to the dollar, and weakening slightly from 179.90 at Wednesday's close.

Dealers said trade was calmer on Thursday after the central bank intervened three times on Wednesday to lift the currency nearer to the target band. For the first time since the devaluation on Tuesday last week, the central bank did not intervene on Thursday to support the naira, but dealers said that did not necessarily mean that pressure on the currency was easing.

Nigeria, Africa's top oil producer, counts on oil sales for 95 percent of its foreign reserves, which fell to $36.8 billion by Nov. 28 from $44.6 billion a year earlier, according to latest central bank data.

The cut in the government's oil benchmark was the second in a month, from an original estimate of $78 a barrel. Brent crude continued to fall on world markets, slipping below $69 a barrel on Thursday.

A much lower oil price will make it harder for Nigeria's government to meet its spending plans next year, stretching its already shaky finances.

Other oil exporting countries including Russia and Mexico have also said they expect oil prices to be lower next year than assumed in their budgets, which may be revised.

For Nigeria, fiscal problems risk reigniting inflation, which has been relatively stable at around 8 percent, and are a headache for President Goodluck Jonathan as he seeks a second term in a presidential election in February.

Nigeria depends on oil for around 75-80 percent of government revenues and its finances have been hammered by a more than 30 percent drop in oil prices since June.

Finance Minister Ngozi Okonjo-Iweala has said Nigeria still has funds to pay salaries and keep debt obligations, but with crude likely to fall, the government would increase taxes on luxury items and ban non-essential government travel to cut expenditure.

Analysts, however, said Nigeria's new oil price benchmark of $65 a barrel was workable. A Reuters poll forecasts Brent will average $82.50 a barrel in 2015.

"It ($65) is definitely more realistic," said Bismarck Rewane, CEO of Lagos-based consultancy Financial Derivatives, adding that at about $12 lower than the actual "gives them more headroom."

"But the next question is: what are you going to give up, from a long list of expenditure items, especially in the run up to the election? That's where the real trick will be."

The allure of Africa's biggest economy to foreign investors has been growing, especially for buyers of its attractively priced debt, but they worry about its tendency to squander its oil windfall in bloated government spending and patronage.

Nigeria's oil money is distributed between three tiers of government -- local, state and federal. The federal budget usually assumes a conservative benchmark price, so money over and above that is deposited into an oil savings account.

Okonjo-Iweala has sought to keep the benchmark low and accumulate savings, but the Excess Crude Account (ECA) has nonetheless declined by billions of dollars to around $4 billion over the past two years even while oil prices were at record highs, partly because of distributions to powerful governors.


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