Economist: Declining oil may end elites’ squabble over public resources

Country’s crude production slides back to 1970 level, says Morgan Stanley
Economic pundits look forward to slight growth next year

With less than two months to Nigeria’s crucial presidential election, The Economist says the declining importance of oil could mark the beginning of a new leadership model and ultimately ends “elites squabble over oil money while ignoring their citizen”.

In an article titled, ‘A Sluggish, suffering giant’ in its print edition, the publication says Nigerian leaders would be compelled to “expand the rest of the economy” when easy oil money stops flowing.
It notes that the forthcoming elections would end President Muhammadu Buhari’s “failed presidency”.

The report does not, however, raise much optimism that there would be a remarkable improvement on the status quo, insisting: “Barring a shock win for Peter Obi, a third-party candidate, the victor will come from the same clique of kleptocratic elites”.
While the respected magazine hints at the possibility of a national leadership reset with the declining role of crude. Morgan Stanley, in its 2023 Global Strategy Outlook, says Nigeria’s oil production has recently slid back to the level of 1970 amidst falling investment in the sector globally.

“The supply side of the oil market is not in good shape: inventories are at multi-year lows, spare capacity is thin, and investment levels have now been so low for so long that concerns about ‘underinvestment’ are arguably justified. On top of this, production growth from US shale has been roughly half,” the investment bank states.

With global headwinds, Nigeria faces peculiar obstacles ranging from imperious insecurity to ruinous oil theft. A Senate Ad-hoc Committee on Oil Lifting suggested that “Nigeria lost over $2bn to oil theft between January and August 2022, with consequent loss of revenue that would support the country’s fiscal deficits and budget implementation.”

In the face of dwindling output, Morgan Stanley projects Brent to rally to $110 per barrel as demand recovery continues, noting that spare capacity is eroding rapidly while capital expenditure response is broadly absent.

“European gas and LNG markets are likely to remain tight and support the price recovery from current levels,” says its forecast document themed, ‘the year of yield’.

“Less growth, inflation, and tightening should support DM (developed market) and EM (emerging market) bonds and lower cross-asset volatility. Continued economic uncertainty should create investor demand for high single-digit returns,” it notes in its projection on the likely performance of the financial market.

Goldman Sachs bets on 1.8 percent average global output growth next year, over one percentage point decline from this year’s 2.9 per cent. Against the fear of a possible slump in the coming year, its forecast says the United States could narrowly escape recession.

The investment bank makes some forecast that seemingly contradicts trends and historical path but insists that the current cycle, coming from the disruption of COVID-19 and the uncommon responses of key variables like employment, stressing that “this cycle is different”.

“To be sure, the tightening in financial conditions is weighing heavily on growth, to the tune of nearly two percentage points at present. But real disposable personal income is rebounding from the plunge seen in H1 – when fiscal tightening and sharply higher inflation took their toll – to a pace of three per cent plus over the next year.

“And while there are risks on both sides, we think the real income upturn is likely to be the stronger force as we move through 2023, especially because the financial conditions drag will likely diminish assuming Fed officials do not deliver dramatically more tightening than the rates market is currently pricing,” it states.

Global investors expect the Federal Reserve System to start interest rate cuts as early as the middle of next year after a marathon hike that has seen the upper limit increase from 0.25 per cent to over four per cent. But the Fed Chair, Jerome Powell, had earlier warned that rate cut expectations may be premature. The divergence suggests a gap between investors’ optimism and Fed direction – a potential cause of another uncertain year ahead.


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