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Nigeria might face recession due to slump in oil price

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Nigerian banks’ credit profiles face severe risks resulting from the slump in oil price as well as the disruptions in operating environment due to the Coronavirus (COVID-19) pandemic, Fitch Ratings has said.

The global fiscal and financial rating firm explained in a release yesterday that the banks’ asset quality deterioration is linked to high exposures to the oil and gas sector and thus remains the biggest threat to ratings.

It also added that the Nigerian economy faces threat of recession as a result of these developments.

Fitch, in a report posted on its website stated: “Oil exports represent 95 percent of the country’s export revenue and strongly influence the broader economy. Falling oil revenue may also lead to further currency devaluation.

Accordingly, the slump in oil prices raises the risk of a recession. Operating environment risks are compounded by economic and financial market disruption amid measures to counter the pandemic, putting pressure on all borrowers.

Forbearance measures announced by the Central Bank of Nigeria (CBN) will provide some relief to businesses and households and help the flow of credit into the economy.

“This will support reported asset quality metrics in the short term but asset quality could deteriorate significantly depending on the duration and severity of the oil price shock and Coronavirus turmoil.”

The latest Fitch report stated further, “The resilience of banks’ asset quality, profitability and capital during the economic downturn will influence, among other considerations, how we resolve the Rating Watches.

“The oil and gas sector represented about 30% of Nigerian banks’ gross loans at end-3Q19.

Accordingly, loan quality is highly correlated to oil prices, as seen during previous oil price shocks in 2008-2009 and 2015-2016.

Impaired loans have decreased since 2017 due to rising oil prices as well as recoveries and write-offs, but the current shock could lead to a significant increase.
Any closures of oil fields due to a collapse in global oil demand would exacerbate the impact”.

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