Nigeria's Economy to Face Headwinds If U.S.-China Trade War Persists - Expert

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Lagos — A financial analyst with FXTM research, Lukman Otunuga, has said Nigeria's foreign exchange reserves, currency, growth and budget will face headwinds should trade disputes between the United States and China persist.

Otunuga, in a chat with Daily Trust, remarked that provided the US dollar keeps weakening there's scope for support from higher oil prices

He said global oil prices looked tired, exhausted and ready for an early summer break during the second quarter of 2019 as global growth fears overshadowed supply disruptions and ongoing OPEC supply cuts.

He argued that oil prices remain shaky and vulnerable despite OPEC's latest decision to extend production cuts until March 2020.

Responding to the crucial question on if oil prices will ever recover and trade back towards the $70+ levels, he said that depended less on geopolitical tensions in the Middle East and more on whether the US and China can reach a trade deal, settling disputes over tariffs and opening the door to continued global growth.

Otunuga said, "In this case, it's likely that oil prices will be injected with a renewed sense of confidence on the back of boosted global growth expectations and demand for oil. But what if the current circumstances persist and the US-China trade disputes continue throughout the second half of 2019?

"Nigeria's economy could benefit considerably if a US-China trade deal is reached and global growth expectations become brighter. The manufacturing sectors in the US and China are the oil-gobbling engines which drive demand for international oil suppliers. China is the world's top crude oil consumer, importing more than 50 per cent of its consumption, part of which comes from Nigeria.

"In the fourth quarter of 2018, Nigeria exported N23.5 billion worth of crude oil to China and remains a major trading partner to the Asian giant. It's likely that if China's economy roars back to life, Nigeria's growth would see more long-term support, benefiting foreign exchange reserves and the naira.

"Although unlikely, if a trade deal were to be announced early in the quarter, it's possible the nation's 2019 budget would also see ample support from increased oil revenues from China. This argument doesn't apply to the US which has considerably reduced its crude oil imports from Nigeria as it heads towards energy independence, relying instead on domestic production to meet its own needs."

In his analysis of an unfavourable scenario, where the world's two largest economies do not reach a trade deal in the third quarter and aggregate demand for oil continues falling as it tracks economic weaknesses in China and the US, as demand for oil is whittled away, "Nigeria's foreign exchange reserves may be negatively impacted, along with the naira, the 2019 budget and most importantly GDP growth.

He further argued that there's another factor that is significant in terms of oil market economics. "Oil sales are denominated in US dollars. Recently, the currency has weakened against its rivals, meaning that oil is more affordable and possibly giving traders an incentive to snap up contracts at current levels before they rise again."

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