The ongoing conflict between Israel and Iran portends a combination of risks and upsides for the economy, underlining the need for proactive plan for negative spillovers.
Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf yesterday said the conflict has added a troubling dimension to the challenges of an already floundering global economy.
According to him, the conflict could worsen global economic situation with economies around the world already grappling with elevated geopolitical tension triggered by the Russian-Ukraine war, Israel-Hamas conflict and profound uncertainty created by the unprecedented tariff disruptions by the Trump administration.
He explained that while the Israeli-Iran conflict could worsen Nigeria’s inflationary pressure and interest rate regime, the conflict could boost foreign exchange (forex) inflows and government’s revenue, thus enhancing ongoing government’s fiscal programme.
“A major driver of energy prices in Nigeria is the global crude oil price. With the outbreak of the Israeli-Iranian war, crude oil prices had surged to $75 per barrel from $65 per barrel a week before. This is a 15 per cent jump within days. This has obvious implications for petroleum product prices globally. Economies around the world, including Nigeria, would witness a surge in the price of petrol, diesel, jet fuel, gas and related products in the near term. This would have far reaching implications for many economies and businesses.
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“Energy cost is a major factor in the Nigerian inflation equation. It impacts production cost, logistics cost, transportation costs, and the cost of power generation. This presents an inflationary scenario. These additional costs would be passed on to final consumers, depending on the degree of consumer resistance. There is also a global inflation dimension. Energy prices have global inflationary implication. Therefore, there is also an expectation of imported inflation in the unfolding geopolitical scenario,” Yusuf said.
He pointed out that high inflation usually drives interest rates as monetary authorities respond to the inflation outcomes of current geopolitical headwinds, adding that a tighter monetary policy regime is expected in Nigeria and other monetary jurisdictions.
He noted that there is expectation that economies around the world may experience renewed pressures on interest rate, with higher global interests adversely impacting portfolio flows and foreign reserves.
He added that high energy cost, elevated inflationary pressures and a spike in interest rates are all headwinds that could undermine the profitability of businesses in the economy.
According to him, investors in the non-oil sector are likely to be more vulnerable in the present situation while Nigerian firms with strong business links in the Middle East and those with strong supply chain linkages in the region would be more vulnerable because of the current instability in the region.
“There is a risk of high monetary growth with an increase in revenue from the oil sector. Money supply increases in the Nigerian economy as oil revenue increases because of the monetisation of oil receipts. This could pose additional inflation risk and exchange rate depreciation risk. This may provoke a tighter monetary policy stance, which could result in difficult credit conditions for businesses in the economy.
“The already floundering global economy would be adversely impacted by this new geopolitical crisis. Global stock markets are reflecting this ominous outlook – the Dow Jones, S & P, and Nasdaq are trending downwards.”
There is a flight by investors towards ‘safe haven assets’ as global uncertainty heightens. However, in Nigeria, there is historically a positive correlation between crude oil prices, GDP growth, and stock market performance. The outlook for the Nigerian stock market is therefore likely to be positive in the current context,” Yusuf said.
He however noted that if the conflict persists, the surge in crude oil price would impact on Nigeria’s forex earnings, oil being the biggest forex earner for the country.
He said the forex inflow could be more impactful if output performance improves citing crude oil price, which had surged to $75 per barrel, about 15 per cent higher than before the outbreak of the Israeli–Iran conflict.
“This development would also positively impact the country’s foreign reserves, ensure better forex liquidity and ultimately the stability of the naira exchange rate.
“The oil sector currently accounts for about 50 per cent of government revenue. An improvement in crude oil price would therefore have a significant impact on government revenue. An improvement in revenue would positively impact fiscal consolidation and hopefully moderate the growth of the fiscal deficit.
“Investments in the oil and gas sector would post better returns if the conflict persists. High oil price is good news for upstream oil and gas investors,” Yusuf said.
Crude oil price rose significantly at the weekend following Israel’s launch of air strikes on Iran’s nuclear assets. The Brent closed at $74.23 per barrel and West Texas Intermediate (WTI) closed $72.92 per barrel. This represents more than seven per cent rise, following an initial 13 per cent spike.
This is significantly higher than the previous month’s average of $63.95 that determined the current fuel price structure. The development has led analysts worried on a looming fuel price increase anytime soon in the event that the current oil price trends persist until the end of this month.
Head, Market Strategy, Ebury, Matthew Ryan, said investors currently fear that a prolonged conflict between Israel and Iran could disrupt the latter’s oil production. Iran currently produces between four per cent and five per cent of the world’s fuel.
“Rising oil prices have broader implications that could both weigh on the global growth outlook and keep inflationary pressures higher for longer,” Ryan told AFP.
He said this could complicate the decision making of major central banks, which would ultimately have to choose between raising interest rates in order to curb inflation, or cut them to stimulate economic growth.
JP Morgan is still predicting oil prices in the low-to-mid $60s for the remainder of this year, and around $60 in 2026. But the bank said the worst case scenario, in light of conflict in the Middle East, could see prices rising to between $120 and $130. This could occur in the case of the Strait of Hormuz being closed, through which 20 per cent of the world’s oil flows, OilPrice.com reported.