* Naira has fallen 4 pct this year on lower oil prices
* Risk of devaluation looms but still may be avoided
* Budget conditions tight as output hit by crude theft
* Nigeria still has relatively low sovereign debt
By Julia Payne
Nov 5 A sharp drop in global oil prices has
raised the twin spectres of a potential currency devaluation and
budget shortfalls in Nigeria just as Africa's biggest economy
gears up for a closely fought and costly presidential election
Nigeria, the continent's top producer, relies on oil for
only 14 percent of its gross domestic product (GDP) but crude
makes up 95 percent of foreign exchange and about 80 percent of
government revenues, both of which have shrunk rapidly as Brent
crude lost more than a quarter of its value since June.
Foreign portfolio investors fearing heavy losses on the
currency have pulled out -- the main share index
hit a 16-month low and the yield on government bonds rose 10
basis points on Wednesday.
The naira has lost around 4 percent this year,
prompting the central bank to hold frequent additional dollar
sales and lower the limit on banks' foreign currency borrowing
in efforts to prop it up.
At around 167 to the dollar, it is well outside the central
bank's target band of 3 percent plus or minus 155 to the dollar.
The last time it was in the target range was in late January.
Foreign reserves fell rapidly from a peak of $48.9 billion
in May 2013 to just $36 billion in June. They have since
rebounded slightly and are currently around $38.3 billion.
Despite these losses, analysts say that a devaluation before
the elections, when President Goodluck Jonathan will seek a
second term, would be so unpopular that it's unlikely unless oil
prices, now at $82 a barrel, tumble further and force the bank's
"It will take some time of relatively low prices ... before
you see foreign reserves really being gobbled up," Matthew
Searle, senior African analyst at Business Monitor
"If oil prices fall further to the $60s or $70s a barrel,
then the central bank will become the main source of dollars,"
and will have to decide for how long it can keep up the fight.
At what point it throws in the towel is hard to tell.
Alan Cameron, London-based economist at Nigeria's First City
Monument Bank, thinks reserves would likely have to slide to
close to $30 billion before a "last resort" devaluation would be
The last time the bank lowered its target range for the
currency was in late 2011 after the naira came under speculative
attack and tight monetary policy failed to defend it.
In addition to a weak currency, Nigeria faces an increasing
squeeze on its government finances.
Finance Minister Ngozi Okonko-Iweala told journalists last
week that "Nigeria is not broke", and analysts agree the country
is a long way from struggling to meet its commitments.
Yet a squeeze on funding is being felt. A source at the
national assembly said money for projects is not being dispersed
as easily as before oil prices fell. An official at a
construction company, who declined to be named, said payments
for a number of projects are in arrears.
Oil analysts do not anticipate Brent recovering to over
$100/bl with an average of $93.70/bl expected in 2015. A
production cut by the Organisation of the Petroleum Exporting
Countries (OPEC) seems unlikely.
Oil producers have become accustomed to high oil prices,
which have held largely above $100/bl since the Arab Spring in
2011, and all are having to adjust to the new climate, but
Nigeria, with a population of 170 million people, was spending
too buoyantly when times were good.
"There was significant fiscal expansion since 2010 as they
were used to much higher oil prices, which makes the current
price really problematic," Samir Gadio, Head of Africa Strategy
at Standard Chartered Bank in London, said.
"You really wonder how they will cope if prices stay at
$85-90 a barrel and sustain the existing position," he said,
adding that even with prices at $100 a barrel it would struggle.
In theory Nigeria saves money over the benchmark price in
the Excess Crude Account (ECA), which builds up a buffer when
times are good that can be run down during commodity shocks.
Yet despite high oil prices the ECA fell to $4 billion by
September this year, according to the latest finance ministry
figures, from a central bank estimate of $11.5 billion two years
In January this year, it was as low as $2.5 billion, before
efforts by the finance minister to build it back up.
Nigeria's budget tends to assume a conservative oil price
but that is usually coupled with an overoptimistic production
figure, particularly as a large volume of oil is stolen.
Nigeria's 2015 draft budget framework assumes an average oil
price of $78 a barrel, up from $77.5 in the last budget, with an
expected output of 2.27 million barrels per day. That is lower
than the 2014 expectation but still above average reported
levels this year of 2 million-2.2 million bpd.
A report by Chatham House last year said at least 100,000
barrels per day was stolen in the first quarter of 2013, and a
lot of output is deferred during shutdowns to fix pipelines.
Such outages coupled with lower oil prices caused government
revenues to fall 16.5 percent in September. A report by a
national conference convened by President Jonathan in March,
said the country was losing an estimated $35 million a day to
And because a degree of oil theft is widely assumed to be
linked to political funding needs, analysts assume it can only
worsen as elections draw near.
The break-even level, the oil price needed to balance the
budget, is significantly higher, well over $100/bl, analysts
say, with Renaissance Capital pegging it at $111/bl for 2014.
However, some economists say Nigeria is still a way from
being in trouble.
"(Nigeria) still has a pretty big degree of control over how
the deficit changes. Spending plans will not necessarily be
curtailed ... From here until the election, I don't think they
have to cut (spending)," Cameron said.
Even with the oil savings account diminishing, Nigeria
has substantial commercial deposits that could also cover any
near-term shortfalls, he added.
In a global context in which many major economies are
struggling with debt, Nigeria is still doing pretty well.
Debt is below 2 percent of GDP or around $9 billion, Gadio
at Standard Chartered said. "It's the lowest of the frontier oil
exporting countries after most was written off in 2005-2006," he
"In terms of sustainability, Nigeria's external debt is very
low so there is very little risk of a default."
(Additional reporting by Tim Cocks in Abuja; Editing by Tim
Cocks and Susan Fenton)