Nigeria "caught in a macro hurricane"

Quiz: Which oil rich economy hammered by the global slump in crude is in the throes of a full-fledged economic crisis — complete with rationing, civil strife and runaway inflation stoked by a weak currency?

If you guessed Venezuela, you'd be wrong. Although the South American country teeters on the edge of collapse and fits the above scenario, those same circumstances actually apply to Nigeria. Once a powerhouse of West Africa's economy, the effects of slumping oil prices have converged with mounting security concerns and widespread energy shortages.

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.

Nigeria "is caught in a macro hurricane," famed short seller James Chanos told the annual Sohn Investment Conference last week. With currency reserves running low, the country could have "a big problem" within a few years, he said. Calling the country "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. This week, Nigeria's stock market staged a relief 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 significant political and security challenges for the embattled government of Muhammadu Buhari, and raise risks that could hit oil production.

"Nigeria is in trouble," Steve Hanke, a professor of applied economics at Johns Hopkins, told CNBC in an interview. Amid double-digit inflation, Nigeria's foreign reserves are dwindling as the government races to shore up a swooning currency, the naira.

Using a purchasing power parity metric, Hanke estimates that the country's prices are surging by a whopping 46 percent, far above the official rate of between 11 and 13 percent.

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. Currently, the country's 2016 budget assumes an oil price of $38 per barrel.

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."

Nigeria still has limited access to capital markets, and a $6 billion currency swap agreement with China may help contain the naira's losses. Yet 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."