Russian-Ukrainian war will increase fuel subsidy payments and domestic borrowing for Nigeria, analysts warn

The ongoing war between Russia and Ukraine is expected to drive up the cost of paying fuel subsidies in Nigeria as well as domestic federal borrowing.

This is the analyst submission from Anchoria Asset Management Limited.

Anchoria Asset Management Limited is part of the VFD Group.

The war, which began last month, caused the floating Russian ruble to lose more than 30% of its value against the dollar, prompting a temporary ban on the sale of Russian assets.

Russia’s Central Bank has halved its reserve exposure to dollar-denominated assets since 2014, with the euro and yuan the preferred alternatives.

To stop Russia’s invasion of Ukraine, a series of Western sanctions were imposed on Russia.

Russian banks have been removed from the SWIFT payment messaging system while Russia’s Central Bank reserves estimated at $630 billion have been frozen

The recent U.S. ban on Russian energy exports, difficulty financing oil deals, as well as disruptions in Russian oil exports caused oil prices to rise more than 30% to $130.

Energy Intelligence estimates that Russian oil exports have already fallen by 2.5 million barrels per day, or a third of its total exports.

With a higher crude oil price that exceeds the benchmark budget of $62 per barrel, there are concerns that Nigeria may not be able to maximize the benefits due to the increased burden of fuel subsidies.

In 2021, when the price of crude oil averaged $62 per barrel, the federal government spent about 1.2 billion naira on subsidizing gasoline.

With the price of oil reaching its highest level in more than eight years, government circles fear that the country could exceed the fuel subsidy budget of 2.55 trillion naira for this year.

But analysts at Anchoria Asset Management Limited said in their report obtained by THE WHISTLERthat since energy costs account for 35% of production costs, higher energy prices will translate into higher production costs and, ultimately, increase inflationary pressures.

The report also says Nigeria will experience high commodity prices, with Ukraine and Russia both accounting for 30% of global wheat supply.

He added that the current dispute would restrict wheat supplies and put upward pressure on wheat prices.

Wheat is a main input used in making bread, noodles and pasta, all of which are staple foods imported into Nigeria.

The report says: “Gas prices are also expected to rise due to supply issues, even though prices are up 84% year-on-year. This will have the ripple effect of a further increase in electricity tariffs.

“Higher energy prices mean higher subsidy payments and therefore higher planned government borrowing. This puts additional pressure on Nigeria’s debt service capacity.

“In the third quarter of 2021, Nigeria’s debt service-to-revenue ratio was estimated at 80%. This implies that for every N10 earned by the economy, N8 is needed to service the country’s debt.

Regarding the implication of the crisis on the Nigerian capital market, analysts in their report said that given the slowdown in foreign investor participation since 2020, they believe the war will have less impact on the capital market. Nigerian capital.

“The Nigerian market has since become less attractive to foreign investors due to its strict foreign exchange policies, capital controls and relatively low level of return, insufficient to compensate for higher risk.

“We expect the direction of yields to be influenced by higher government borrowing and lower levels of liquidity expected in the second half.

“Given the expected rise in rates, the strategy is to overweight bonds with shorter durations and underweight bonds with longer durations.

“We are optimistic on the defensive sectors, in particular those of telecommunications and financial services. Investors can take positions in fundamentally sound stocks with double-digit dividend yields,” the report adds.

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