International credit rating agency, the Standard & Poors has predicted that oil price slump would impact negatively on the banking sector’s profitability and economy of Nigeria as well as other oil exporting countries with low fiscal buffers.
Although, S&P expects Brent’s price to stabilise around $55 per barrel in 2015 and increase slightly to around $65 per barrel in 2016, it disclosed that the drop in oil prices to $55 per barrel for Brent as of mid-February from above $100 per barrel a year ago would leave most oil dependent economies vulnerable. “While our base-case scenario assumes this drop will not significantly affect the performance of oil-exporting countries’ banking systems, a few of them could suffer higher credit losses and lower liquidity,” says Mohamed Damak, an analyst with S&P.
Among the banking systems of oil exporters S&P analysed, Nigerian banks display the highest direct exposure to the oil sector, with loans accounting for about 25 per cent of the total at year-end 2014. “This is due to the structure of Nigeria’s oil sector where, unlike the majority of other oil-exporting countries, local private sector companies conduct some of the upstream, or production, activities,” Damak adds.
Continuing, he says: “While we think these companies have accumulated some cash during the past three years, we cannot rule out negative effects on Nigerian banks’ asset quality indicators as the decline in oil price depletes these buffers.”
With the oil sector contributing about 14 per cent of Nigeria’s Gross Domestic Product (GDP), approximately 70 percent of government revenue and around 90 percent of the country’s exports, S&P predicts that the slump in oil price would have negative ‘knock-on effects’ on the her overall economic performance in 2015. “Our economists forecast a drop in real GDP growth from 6.3 per cent in 2014 to 5 per cent in 2015,” Damak sums up.
By Olisemeka Obeche