When the price of oil crashes, Nigeria’s stocks usually sees a huge sell off. At the close on March 10, the country's All Share Index had fallen 4.91%, while bank stocks were down 12.5% on the previous day.
Emerging market oil exporting nations need to act fast. As well as managing the impact of a capital market hit, they need to revise budgets, tighten monetary policy, stem inflation and shore up foreign exchange to maintain some semblance of stability. Add the coronavirus pandemic and the possible fall in demand from China into the mix, and government action must be accelerated.
In sub-Saharan Africa, a number of countries hit by the oil price collapse in 2014 have better defences in place this time around. In particular, Angola and Gabon both now have IMF programmes in place, which should improve their ability to respond. But international investors remain skittish about Nigeria, given the administration's apparent inability to act when crisis hits.
In 2015, when Nigeria elected president Muhammadu Buhari in the country's first free and fair election, optimism was high and change felt inevitable. The election marked a new phase in Nigeria's development: corruption would be eradicated and a renewed push for economic diversification would transform the country away from its overall reliance on oil.
But this optimism vanished as the new administration failed to get to grips with the challenges of very low oil prices.
Eventually, it chose to levy import duties, revise the budget and devalue the currency – but it was all too little too late. Banks, over exposed to the oil and gas sector at the time, saw non-performing loans surge. By 2016, the country had fallen into recession.
Discouragingly, a similar fate may befall Nigeria again.
[The administration's] philosophical approach to the exchange rate hasn't really changed in the last five to six years, [so] the way they will react to this crisis would likely be the same as well
- Adesoji Solanke, Renaissance Capital
On March 11, Nigeria announced it will review its December budget, which was based on an oil price of $57 a barrel.
The review is a good first step in the current circumstances.
Central bank reserves in Nigeria have fallen 20% over the last two years and are now at $36 billion, edging closer to the central bank's limit of $30 billion.
Currency devaluation should also be on the agenda, but Nigeria's administration appears to be transfixed on the need to keep the naira at current levels for as long as possible.
Meanwhile, the banking sector is still heavily tied to the oil and gas sector, which threatens a surge in NPLs once again.
"We have the same administration in power as we did in 2015 at the height of the previous oil crisis," says Adesoji Solanke, director of frontier and sub-Saharan Africa banks equity research at Renaissance Capital based in London.
"Because their philosophical approach to the exchange rate hasn't really changed in the last five to six years, the way that they will react to this type of crisis would likely be the same as well."
For Solanke, this is a case of history repeating itself.
But there are some reasons for optimism: members of the administration who recognise the challenges.
Adedoyin Salami, chair of the Economic Advisory Council (set up by Buhari in October 2019) and previously a member of the Central Bank of Nigeria's Monetary Policy Committee, is a well-respected economist and a growing force within Nigeria's seemingly paralysed administration.
Bismarck Rewane, managing director of research company Financial Derivatives, is also a member of the MPC and has been a staunch critic of Nigeria's economic policies.
While Charles Soludo, an economics professor and former central bank governor has been similarly scathing about current policy and policymakers, and has blamed a weak legal system and antiquated institutions for Nigeria's economic stasis and over-reliance on oil.
"These are the types of leaders I put our clients in front of," one banker tells Euromoney. “They are experts and they talk a lot of sense. These are the types of people that will help maintain stability in complicated times and hopefully they will be able to influence policymakers.”
Any action – or inaction – in the next few days will be able to tell us if Buhari's government will take a different path this time.