Nigerian banks to experience worsening asset quality- Report
A report by Fitch, an international rating agency has said that the Nigerian Banking sector will experience worsening asset quality on the backdrop of macro economy challenges.
The firm listed problems in the oil industry and foreign exchange rate pressures on borrowers to service their loans as the key problems that might worsening banks assets quality this year.
Fitch stated that the Central Bank of Nigeria (CBN) reported that industry’s non-performing loans (NPLs) grew to 11.7 per cent of gross loans at end-June 2016, up from 5.3 per cent at end-December 2015.
“Tight foreign currency liquidity has also led to some Nigerian banks experiencing difficulty in meeting their trade finance obligations which were either extended or refinanced with international correspondent banks,” the report by Fitch said.
According to the report, the country’s fiscal policy has been predicated on finding sources of external funding to finance increases in capital spending.
“The draft federal budget for 2017 calls for total spending of N7.3trillion in 2017, up from the N6.1trillion contained in the 2016 budget.
“Fitch does not expect the government to fully execute the capital spending envisaged in the 2017 budget, approximately N1.8trillion, or 1.5per cent of Gross Domestic Product (GDP), but it will have to finance an overall federal government deficit of approximately N2.6trillion.
“The authorities’ financing plan calls for borrowing between $3billion-$5billion from external sources to finance the 2017 deficit and parts of the 2016 budget.
“The bulk of external borrowing will come from multilateral development banks and the government is also likely to go to market with a Eurobond offering of $1billion in 1Q17.
“The Nigerian government has negotiated $10.6billion in export credits for financing infrastructure development; which is currently awaiting parliamentary approval.
“The government’s financing plans also call for domestic issuance of approximately N1.3 billion in 2017 and use of its overdraft facility at the CBN, which the government reports currently at N1.5 trillion.
“Nigeria’s oil sector will receive a boost from the improved security situation in the Niger Delta and Fitch expects oil production to average 2.2 million barrels per day (mbpd) in 2017.
The report explained further: “Oil production fell as low as 1.5 mbpd in August, before recovering to 1.8 as of October 2016. The recovery in oil revenues and increased fiscal spending could boost the economy in 2017, if the government can arrange improve the execution of capital expenditures.
“However, the present lull in violence and oil infrastructure attacks will only hold if the government can come to a more permanent peace settlement with Niger Delta insurgents.
“The government’s policy of import substitution has contributed to significant import compression, which allowed the current account deficit to narrow to an estimated one per cent of GDP in 2016, down from 3.1per cent in 2016.
“The naira depreciation in June helped to slow the loss of reserves and forward operations by the CBN allowed the authorities to clear a large backlog of dollar demand.
“Gross international reserves of the CBN stood at $27.7billion in late January, down from $29billion at end-2015, but higher than the August 2016 position of $24.2billion.
“The oil sector has shrunk to account for about 10per cent of Nigeria’s GDP, but the overall economy is still heavily dependent on oil, which accounts for up to 75 per cent of current external receipts and 60% of general government revenues.
“The Nigerian senate has promised to pass the Petroleum Investment Bill (PIB) in early 2017. The PIB has been under consideration for nearly a decade and could help increase efficiency and transparency in the Nigerian National Petroleum Corporation.
“Nigeria’s ratings are constrained by weak governance indicators, as measured by the World Bank, as well as low human development and business environment indicators and per capita income,” the report explained.
