Oscarline Onwuemenyi 10 March 2015, Sweetcrude, Abuja – International credit rating agency, Standard & Poors has said that banking sector profitability and asset quality in oil exporting countries including Nigeria would be vulnerable to low oil prices especially in those that have relatively low fiscal buffers.
Following the significant drop in oil prices over the past few months, reaching around $55 per barrel for Brent as of mid-February compared to more than $100/bbl a year ago, the rating agency has revised its price assumptions. S&P now expects Brent’s price to stabilise around $55/bbl in 2015 and increase slightly to around $65/bbl in 2016.
Mohamed Damak, an analyst with S&P observed that, “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.
“In particular, the banking systems of countries with low fiscal buffers, significant economic imbalances, and high dependence on oil-related bank deposits may come under pressure.”
While analysts do not expect oil’s price drop to have any major negative implications on these countries’ banking systems, in the GCC, banks in Bahrain and Oman are vulnerable indirectly through the potential drop in investments and economic growth.
In Nigeria, the banking system is directly impacted through its significant overall exposure to the oil sector.
Brunei is exposed to both channels, owing to the significant contribution of the oil and gas sectors to its economy and its high direct exposure through contractors, suppliers, and oil and gas companies’ employees and civil servants.
“We foresee manageable credit losses in Brunei for 2015 to around 0.9 per cent to 1 per cent, as our base-case scenario excludes major layoffs and cuts in capital expenditures in the government and oil sectors,” said Damak.
Among the banking systems of oil exporters, 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.
“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,” Damak pointed out.
Oil sector contributes about 14 per cent of GDP, approximately 70 per cent of government revenues, and around 90 per cent of exports.
Therefore low oil price is expected to have negative knock-on effects on Nigeria’s 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,” he said.