If you guessed Venezuela, you’d be wrong. Although the South American country teeters on the edge of collapse and fits the above scenario, those same circumstances actually apply to Nigeria. Once a powerhouse of West Africa’s economy, the effects of slumping oil prices have converged with mounting security concerns and widespread energy shortages. The OPEC country, which produces more than 2 million barrels of oil per day, is resorting to rationing imported refined petroleum products in order to fill their tanks; citizens must endure long lines overseen by authorities.
Nigeria “is caught in a macro hurricane”, famed short seller, James Chanos, told the annual Sohn Investment Conference last week. With currency reserves running low, the country could have “a big problem” within a few years, he said. Calling the country “a borderline failed state”, Chanos added that he was shorting South African assets, in part because of their exposure to Nigeria.
In the year that Nigerians elected a new president, oil prices collapsed by at least 30 percent. This week, Nigeria’s stock market staged a relief rally after the closely watched MSCI Frontier Markets Index decided to keep the country in the benchmark, after warning last month that Nigeria was at risk of being booted from the index. Still, the outlook for Africa’s largest economy remains grim. The extremist group, Boko Haram, has created significant political and security challenges for the embattled government of Muhammadu Buhari, and raise risks that could hit oil production.
“Nigeria is in trouble”, Steve Hanke, a professor of applied economics at Johns Hopkins, told CNBC in an interview. Amid double-digit inflation, Nigeria’s foreign reserves are dwindling as the government races to shore up a swooning currency, the naira.
Meanwhile, oil prices remain firmly under $50 per barrel, heightening the risk of what consulting firm, PriceWaterHouseCoopers (PWHC), noted in a 2015 report could become a “security shock,” as weak growth feeds political instability. Currently, the country’s 2016 budget assumes an oil price of $38 per barrel. Razia Khan, chief economist for Africa at Standard Chartered, expects crude will rise later in the year, but growth is likely to remain muted. Khan noted that the International Monetary Fund “expects growth to decline even further in 2016, to 2.3 percent.”
Nigeria still has limited access to capital markets, and a $6 billion currency swap agreement with China may help contain the naira’s losses. Yet with oil is still hovering near historic lows, and analysts are skeptical Nigeria will see a turnaround anytime soon. “Following a tumultuous year for the naira in 2015, we believe that any recovery in the currency will have to be supported by a marked improvement in the crude oil price,” Standard Chartered’s Khan said, adding that oil would need to rise to near $55 to offset the effects of an “oversupplied market.” Click to read original article
— CNBC’s Dawn Giel contributed to this article.