Enron Short Seller Says Nigeria Is A Borderline Failed State

Enron Short Seller Says Nigeria Is A Borderline Failed State

From CNBC. Story by Dawn Kissi

Nigeria, the OPEC country which produces more than 2 million barrels of oil per day, is resorting to rationing crude. In order to fill their tanks, citizens must endure long lines overseen by authorities.

With currency reserves running low, Nigeria could have “a big problem” within a few years, said famed short seller James Chanos at the annual Sohn Investment Conference last week. Calling Nigeria “a borderline failed state,” Chanos added that he was shorting South African assets, in part because of their exposure to Nigeria.

In the year that Nigerians elected a new president, oil prices collapsed by at least 30 percent. Last week, Nigeria’s stock market staged a rally after the closely watched MSCI Frontier Markets Index decided to keep the country in the benchmark, after warning last month that Nigeria was at risk of being booted from the index.

Still, the outlook for Africa’s largest economy remains grim. The extremist group Boko Haram has created political and security challenges for Muhammadu Buhari.

“Nigeria is in trouble,” said Steve Hanke, a professor of applied economics at Johns Hopkins, in a CNBC interview. Amid double-digit inflation, Nigeria’s foreign reserves are dwindling as the government races to shore up the naira.

Hanke estimates that the country’s prices are surging by a whopping 46 percent, far above the official rate of 11-to- 13 percent.

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Weak growth — Nigeria’s economy expanded by less than 3 percent last year — has done little to curb soaring food prices, which have risen every month since December 2015.

Meanwhile, oil prices remain firmly under $50 per barrel, heightening the risk of what consulting firm PricewaterhouseCoopers noted in a 2015 report could become a “security shock,” as weak growth feeds political instability.

Razia Khan, chief economist for Africa at Standard Chartered, expects crude will rise later in the year, but growth is likely to remain muted. Khan noted that the International Monetary Fund “expects growth to decline even further in 2016, to 2.3 percent.”

Oil gives Nigeria around 95 percent of its foreign earnings. Should crude remain at current levels, PwC expects growth to contract and oil revenues to dwindle to $20 billion. Meanwhile, the currency has already overshot PwC’s worst-case forecast for this year, blowing past 320 to the U.S. dollar recently.

“The currency is junk and the government is incompetent and corrupt,” said Johns Hopkins’ Hanke. “The only sure-fire way to solve all these problems is for Nigeria to officially replace its junk currency.”

With oil still hovering near historic lows, analysts are skeptical Nigeria will see a turnaround anytime soon.

“Following a tumultuous year for the naira in 2015 we believe the any recovery in the currency will have to be supported by a marked improvement in the crude oil price,” Standard Chartered’s Khan said, adding that oil would need to rise to near $55 to offset the effects of an “oversupplied market.”

Read more at CNBC.