Page 5 - AfrOil Week 11 2020

AfrOil COMMENTARY AfrOil
 Employment
Oil and gas development accounts for such a large share of Nigeria’s economy that employ- ment levels are sure to fall.
Major international oil companies (IOCs) may already be preparing to cut staff. A source inside the Ministry of Petroleum Resources told New Telegraph last week that several IOCs had begun talks with NNPC on downsizing and cost-reduction programmes.
The first to lose their jobs will probably include independent contractors who have been working for IOCs, along with the employees of service providers working to support IOCs, another source said. He also asserted that it was “just a matter of time” until these cuts happened.
Banking
Nigeria’s baking sector is set to take a hit as well. The country’s banks have yet to recover from all the setbacks they suffered in 2014 and 2016, when low oil prices led to economic contrac- tion, a drop in foreign exchange reserves, loan defaults and a devaluation of the naira. They now appear to be heading for more trouble.
Aderonke Akinsola, a banking analyst at Lagos-based Chapel Hill Denham, told Bloomberg that Nigerian banks would have trouble turning a profit this year. “[Current con- ditions] pose downside risks to the profitability of banks in 2020, mainly given the likely impact on asset quality and loan growth,” he said. “Cap- ital adequacy ratios of banks are more at risk amid the current macro realities.”
Nigeria’s central bank has responded by imposing a one-year moratorium on the repay- ment of principal debts. This move will, pre- sumably, help to relieve pressure on enterprises struggling to cover loan payments. It will also extend Abuja’s timeline for efforts to bring the banking industry’s share of non-performing loans down from the mid-2019 level of 9.3% to 5% or less. (Moody’s Investors Service had said earlier that it expected this figure to sink to 6-8% in 2020, but it is now predicting a higher number.)
Finance and currency
Meanwhile, the country’s overall financial standing is also at risk. Jan Friederich, Fitch Rat- ings’ top sovereign analyst for the Middle East and Africa, told Reuters last week that lower oil prices put Nigeria and other states that are dependent on oil revenues at risk of a credit rat- ings downgrade.
“Countries that are in a somewhat vulnerable external position and have a fixed exchange rate are of course particularly vulnerable,” he told the news agency.
Under the circumstances, some observers have called on Abuja to devalue the national cur- rency. For example, Moses Ojo, the chief econ- omist at PanAfrican Capital Holdings in Lagos, said last week that the central bank simply could not afford to continue supporting the naira in the face of lower oil prices and falling foreign currency reserves.
Likewise, Harry Broadman, the chairman of Berkeley Research’s emerging markets prac- tice in Washington, asserted: “Unless some- thing dramatic happens to tighten oil supplies, it is hard to argue Nigeria will be able to avoid devaluation.”
CBN has dismissed such arguments, though. On March 12, the central bank said that “mar- ket fundamentals do not support naira deval- uation.” It also described the country’s forex reserves as “robust and comfortable.”
Meanwhile, no less than 14 of the 16 inves- tors and analysts polled by Bloomberg last week predicted that the government would take this step before the end of the year, and the other two said they expected devaluation plans to move forward in early 2021. Ten of them said they forecast the naira’s value to be adjusted down- ward by 10-15%.
Revenues
According to a new report from Goldman Sachs, Nigeria lost more than $300mn as a result of the crash in oil prices between March 6 and March 9. Given that the government’s budget for the year is based on an average oil price of $57 per barrel, these three days alone cost Abuja at least $335.7mn, the report said.
More pain is likely to follow. Goldman Sachs said that Nigeria might lose another $8.63bn worth of revenue over the next six months if world crude prices average $30 per barrel.
There is no guarantee that oil will remain at that level, by the way. Rystad Energy said in a note dated March 11 that rising supplies might drive prices down to $20 per barrel. If this sce- nario comes to pass – and it might, given that WTI futures have dropped below $25 and Brent futures below $30 – Nigeria’s revenue shortfall will be even more dramatic.
Moreover, the impact of such a shortfall might be even more painful because the gov- ernment has less of a cushion to protect itself from oil price fluctuations. Ahmed Idris, the accountant-general of Nigeria’s federal govern- ment, said last week that the balance of the coun- try’s Excess Crude Account (ECA) had dropped from $324.96mn as of mid-January 2020 to $71.81mn as of early March. ™
“ have put Nigeria
Lower oil prices
and other states that are dependent on oil revenues at a risk of a credit ratings downgrade
Nigeria has found more buyers for April-loading cargoes (Photo: The Nigerian Voice
Week 11 18•March•2020 w w w . N E W S B A S E . c o m P5