OPINION: WHY A VENEZUELAN REGIME CHANGE WOULD BE DISASTROUS FOR NIGERIA’S ECONOMY & WORLD ECONOMIC GROWTH
The recent political tensions in Venezuela is increasingly shaping out to be one of the more defining geo-political issues of 2019. This is due to its ability to severely affect world economic activities in 2019.
Apart from the fact that renewed Venezuelan political tensions will potentially open up a new cold war front, smack in the middle of the United States backyard, the fact that Venezuela has the world’s largest proven crude oil reserves (300,000 million barrels) also increases the stakes involved.
Venezuela’s crude oil production has fallen in the last few years due to a combination of bad management, (the current head of PDVSA is a serving general who seems to have been chosen more for his loyalty and troop command, than his managerial abilities) corruption and fixed asset depreciation. Fixed asset depreciation in particular has led to a deterioration in Venezuela’s ability to ramp up production, as the country lacks the financial capacity necessary to facilitate part replacements and equipment upgrades needed to boost oil production.
Thus, a Venezuelan government more beholden to Trump and the United States of America, in the event of a regime change, will be more likely to benefit from the USA’s benevolence in obtaining the necessary funding to ramp up oil production to previous levels. This serves Trump’s agenda of a sustained reduction in crude oil prices, while bringing about a potential increase in oil revenues for Venezuela (apart from other critically needed FDI & FPI that may be hinted at if they play ball).
An increase in Venezuelan crude oil production to mid-trend levels of 2.5 million barrels per day leads to an additional 1 million barrels of crude flooding the global markets. Assuming a continuance of the relationship witnessed between crude oil supply and prices in the last quarter of 2018 (the oil glut caused by global expectation of a 2 million barrel reduction in Iranian oil supply, and therefore an increase in production by this same amount which in turn lead to an over $30 drop in crude oil prices), global crude oil prices may drop by as much as $15, depressing crude oil prices to sub $50 levels. This fall may be even steeper if Venezuela is able to take production to previously observed highs of 3.5 million barrels per day.
This does not bode well for monolithic oil producing countries such as Nigeria. Nigeria’s 2019 draft budget of N8.83 trillion is predicated on an average crude oil price of $60 per barrel in 2019, and daily average production levels of 2.3 million barrels per day. Both assumptions are highly optimistic to start with, with crude oil price at $55.18 when the draft was released, and average 2018 production levels hovering at 1.72 million barrels per day.
Holding all other budgetary assumptions constant, A $10 reduction in average would lead to fall in Nigerian government revenues of over N2.5 trillion. Adding this to the proposed budget deficit assumption of N.185 trillion, Nigeria could very well end up funding 49.26% of its proposed budget via debt. This would push Nigeria way above debt levels last seen in 2005. Further relaxing budgetary assumptions of average crude oil production to current realities of 1.72 million barrels per day would lead to a total budgetary deficit of N7.549 trillion,. This may result in Nigeria potentially funding 87.53% of its 2019 budget via debt if budgetary assumptions remain as they are and a change of regime in Venezuela crystallises.
In the event of these series of events occuring, all major Nigerian macro-economic indicators will head south, with Nigeria facing a potentially bad recession. Increased pressure to borrow will lead to a sharp rise in interest rates, particularly as Nigeria’s ability to pay back is severely impacted by reduced oil earnings and depressed oil prices. Projected currency levels of N390 to N405 to the USD (based on interest rate differentials over a period of 6 months) will certainly depreciate further and in turn would lead to an official devaluation of the Naira. This coupled with high interest rates and a proposed increase in minimum wages would certainly lead to severe inflationary pressures, with the CBN most likely having to raise benchmark rates as a defence mechanism against this. Purchasing power would be affected, companies would generally report lower earnings (if not losses) and in turn both the equities market and the fixed income markets would face a contraction.
This bleak scenario holds not just for Nigeria, but for Saudi Arabia, Russia and a host of other oil production dependent economies who need higher oil prices to balance their books. Saudi Arabia for example needs oil prices to be at $84 to meet budgetary expectations. Most of these countries also account for a large portion of world consumption, since most of them hardly produce any other resource or consumable apart from crude. Thus, world economic activities would slowdown and may even lead to a worldwide economic depression.
Where does OPEC feature in all these assumptions? The power of OPEC is gradually dwindling amid disharmony amongst members. Iran, Qatar and Venezuela have either pulled out of the cartel or else act in their individual best interests, while the Saudis back a current sustained reduction in oil prices (30 pieces of silver for the blood of Khashoggi). A call to cut oil production as a measure to shore up prices may well fall flat on its face due to conflicting interests, (Venezuela most certainly would not follow calls to reduce oil production and Iran would want to earn as much foreign revenue as possible before concessions are taken away) and squabbles over which countries would bear the brunt of the cuts. Even if member states agree to an oil cut, budgetary assumptions would be impacted.
It is therefore no news that Russia and China have lent their voices to regime stability in Venezuela. Reports of Russian mercenaries moving into Venezuela in recent days to protect Maduro buttresses the high stakes revolving around who governs Venezuela. A liberalisation of the Venezuelan economy given the fragility of the world economy on the backdrop of trade wars, slowing global markets and increased nationalist sentiments raises the risk of a worldwide economic slump.
It would better serve the world for the time being if Maduro remains in power.
Sources: Trading Economics (www.tradingeconomics.com) , BBC for Combination Headline Photograph (www.bbc.com)
All opinions expressed are strictly those of the author and are not necessarily the view of any institution, organisation or body he may be affiliated with.
Article first published on LinkedIn on 26th January 2019.